IAS21 Foreign Currency

Question 1

Definition of functional currency

Answer 1

Functional currency is the currency of the primary economic environment in which the entity operates.

Question 2

What are determining factors of functional currency?

Answer 2

• The currency that mainly influences the sales prices for goods or services.
• The currency that mainly influences labour, material and other costs of providing goods or services.
• The currency in which funds from financing activities are generated.
• The competitive force and regulations in the country to determine the sale price.
• The currency in which receipts from operating.

Question 3

For a foreign operation, what are the factors needs to be considered (whether its functional currency is the same as that of the reporting entity)?

Answer 3

• The activities of the foreign operations are carried out as an extension of the reporting entity, rather than being carried out with a significant level of autonomy.
• Transactions with the reporting entity are high or low proportion of the foreign operation’s activities.
• CFs from the activities of foreign operations directly impact the CFs of the reporting entity.
• CFs from the activities of foreign operations are sufficient to serive exisiting and normally expected debt obligations.